Sears moves to renew focus on stores

Loss of credit card income could hurt retailer

March 27, 2003|By Susan Chandler, Tribune staff reporter.

When he took the helm at Sears, Roebuck and Co., Alan Lacy promised incremental change. Instead, he has delivered a series of bold strokes.

The latest came Wednesday, when Sears announced it was putting its profitable credit card business on the block to focus on its retail business, which sells everything from TVs to treadmills to lingerie.

It's a dramatic move that Sears hopes will generate as much as $7 billion, or just about what the stock market values Sears' entire franchise at today.

But retail experts and former Sears executives doubt whether Sears' retail business can stand on its own. Its market share is shrinking at a time when rivals such as Wal-Mart Stores Inc., Target Corp. and Kohl's Corp. are growing at a rapid clip. And the credit unit regularly contributes more than 60 percent of the company's annual profit, providing an important cyclical counterbalance to its retail side.

Skeptics also point out that there's no evidence yet that Lacy's re-engineering of stores is getting more shoppers in the door or convincing them to spend more. On the contrary, sales at its 870 department stores have declined for the past 18 months, sometimes by double digits. They also say they haven't heard Lacy articulate a cohesive retail strategy that will reverse that trend.

To some Sears veterans, selling the credit card business smacks of desperation from a management team that can't figure out how to make the retail side of its business work--and is looking for a quick fix.

"There has always been a symbiotic relationship between retail and credit. It's part of Sears' soul," says one former high-ranking Sears executive. "We sold the good life and ability to finance that life."

Some retail experts agree that Sears could benefit from a greater emphasis on its retail business. "They've got to become a better retailer. They've got to focus on that," says George Whalin, president of Retail Management Consultants in San Marcos, Calif.

He also gives Lacy credit for acting audaciously. "He is doing the right thing. He is a visionary. He may not be the guy in the long term, but he is certainly the guy to shake up the company and move it forward. Sears has been the most stick-in-the-mud company in the world."

Although it may seem an abrupt strategic turnaround, Sears' decision to sell its credit business has been well considered, Lacy said in an interview. The possible sale has been discussed four times since Lacy joined Sears' finance department eight years ago, he said.

The driving force behind the decision is Sears' abysmally low stock price, he acknowledged. Shares have fallen more than 60 percent since last summer.

"Having our share price at this ridiculously low level is unacceptable," Lacy said. "We are doing it because we have the opportunity to get to a better place."

Investors welcome plan

Sears' announcement about credit was greeted warmly by frustrated Sears investors: Shares rose $2.69, or more than 12 percent, to close at $24.14 Wednesday, far from their 52-week high of $59.90.

Sears says it would use the proceeds to reward shareholders in some unspecified manner, pay down debt and reinvest in its retail business. Almost all of the $28 billion in debt on Sears' balance sheet is used to fund its credit business. The rest is related to its $1.8 billion purchase of catalog retailer Lands' End Inc. last year, another of Lacy's dramatic moves.

Still, changing Sears' focus will be difficult, experts agree, because Sears has a banking culture that has been in place for decades.

Sears is such a credit-driven organization that the merchants who fill the store with merchandise often feel like stepchildren in an organization where credit is the fast-track place to work.

"There has always been a rivalry between the merchants and the credit card people. It's especially galling when the merchants hear that `We made all our money in credit last year,'" said Sid Doolittle, veteran retail consultant with Chicago's McMillan/Doolittle. "But if you don't sell anything, you don't make money in credit."

Sears' incentive to get customers to use their Sears credit card affects everything from what products the company sells to what products they decide to advertise, Doolittle says.

In fact, Sears' $31 billion credit portfolio is outsized compared with rivals such as J.C. Penney Co. because Sears sells big-ticket items such as home appliances and plasma TVs, which many families pay off over time on their Sears card.

Others experts are baffled that Lacy, a finance whiz who once headed Sears' credit business, would be the Sears honcho who proposed getting out of credit.

Under Lacy's leadership, Sears went without a chief merchant for two years. And Mark Cosby, who was recruited in November to fill that void, doesn't have any previous retail experience. He left a job as chief operating officer of fast-food purveyor KFC to join Sears.